A Bet Against The Hong Kong's Peg, The Rise of the Yuan

Hong Kong's currency, the Hong Kong dollar, appears to be trading below the band allowed for its currency.

And the Wall Street Journal suggests that this appears to be a bet against the Hong Kong peg to the US dollar.
This from Wall Street Journal, (bold emphasis mine)

``Hong Kong won't break its 26-year-old currency peg to the U.S. dollar.

``Wanna bet?

``Traders in the currency forwards market are doing just that. Forwards give investors the right to buy or sell a currency at a fixed price at a certain point in the future, and they're now being traded with a view that the Hong Kong dollar is going to appreciate against the greenback.

``It's a trade that ignores history and the consensus among economists. In the past, it has proven a losing proposition.

``But the speculation highlights new pressures on the Hong Kong Monetary Authority. Hong Kong remains the gateway for foreign investors to profit from China's economic recovery and general strength, even as the dollar's value erodes on international markets due to the U.S. fiscal blowout.

``The forwards market currently implies that the value will be $7.726 in a year's time. Further out, the market is signaling an appreciation of 9% in the Hong Kong dollar by 2019.

``In recent months, the Hong Kong dollar has been stuck at the bottom of its band, and the HKMA has been printing Hong Kong dollars to sell on foreign exchange markets -- some US$44 billion over the last nine months -- to defend that."

Traders are betting on the fear that all this new money will inflate asset bubbles -- the bogeyman du jour -- which could force the HKMA to let its currency appreciate."

My take:

Since the Hong Kong currency has been pegged to the US dollar it implies that Hong Kong has essentially been importing its monetary policy.

Yet, the inflationary path undertaken by the US government suggest that Hong Kong is equally importing inflation-hence the rapid monetary expansion that has been fueling booming property and stocks.

Equally, the conditions of the economy of Hong Kong and the US are distinct. Hong Kong's relatively lesser degree of leverage amplifies the inflation transmission.

Additionally, the China's policy to promote the Yuan as regional currency standard equally puts pressure to the Hong Kong dollar as the Yuan gains more use than the Hong Kong dollar in Hong Kong's economy.

Lastly I wouldn't bet on past performance.

In my view, the Hong Kong dollar's pegged days seems numbered. And so as its existence, as the Yuan could displace it sometime in the near future.

All these would depend on the fate of the US dollar.